Overfunding a 401(k) has tax consequences

Q: I know employees over 50 can contribute $20,500 a year in 401(k) plans. Is this only employee contributions, or the total of employer and employee contributions? What if you contribute more? I have two part-time jobs and contribute at both jobs, so it is difficult to stop contributing at the precisely correct time. If I've overcontributed, will I lose that money? -- Gene Dobrovsky, 57, Arlington Heights, Ill.

A: You've hit on a problem that may become more common as late-career Baby Boomers begin downshifting to more part-time work instead of quitting all at once.

The limit for 2007 is $15,500, plus your $5,000 catch-up contribution available to savers older than 50. That $20,500 refers to your contribution, not your employers' contribution. The limit for 2006 (for tax returns filed this month), was $15,000 plus the catch-up.

Your withholding would be easier if you made enough at one job to have your entire contribution with a single employer. But you may qualify for matching funds at both employers or you may simply like more investment options.

So it's up to you to watch your total contributions to all employer plans throughout the year and cut them off when you reach the limits.

If you go over the limit in any year, you must notify one of your employers before the tax filing deadline the following April, said Eric Aschenbrenner, an employee benefits specialist with law firm Brodek & Gillard in Racine, Wis.

The employer will then return the overage and file an amended W-2 form for your taxes, Aschenbrenner said.

Wait until after the filing deadline and you'll have to pay income tax twice on the amount that goes over the limit, he said, once for when you contributed the pay and again on withdrawal.

More savers are running into the contribution limits as they approach traditional retirement age and realize their savings won't be enough to cover old age, said Michael Haubrich, a certified financial planner with the Financial Service Group, also in Racine.

Haubrich specializes in financial planning that uses a person's career as a financial asset to be managed, helping clients think of their earning power as a wealth-building tool.

Managing multiple 401(k) plans is only one of the issues he's helped over-50 clients navigate. In addition to straightening out the contributions, he said, older workers need to think about their work as a depleting asset.

"Eventually that asset will become dry, so you need to ultimately build a sinking fund for the day when you can no longer work at all," he said. "I worked with a pharmaceutical executive who worked independently ... working hard for 12 to 24 months, then off for six months. You have to manage that cash flow."

Finally, he said, pay close attention to your health.

"Because of the poor savings rate, a career is often still the No. 1 financial asset of the average 65 year old," he said. In other words, try to take care of yourself, or all the catch-up contributions in the world won't help.

Q: Why does Social Security, when giving out a raise, round down to the nearest full dollar? -- Burgess R. Field, 71, Ticonderoga, N.Y.

A: Rounding down the Social Security benefit is a practice that dates back to 1981, when Congress enacted the practice as a way to save the federal program money without greatly impacting any single recipient, said Kia Green, a spokeswoman for the Social Security Administration.

"A Social Security benefit is rounded to the next lower dime at each step of the computation to arrive at the primary insurance amount. Then, if the benefit is not an even dollar amount, it is rounded down to the next lower dollar" after deduction of the Medicare premium, if any, she said.

For details, go to https://s044a90.ssa.gov/apps10/poms.nsf/lnx/0300601020!opendocument.

E-mail Janet Kidd Stewart at yourmoney@tribune.com.

Have a retirement question? Write to yourmoney@tribune.com, or via mail at Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago, IL 60611. If your letter is selected, we may include you and your question in a future column.

The Evergreen Park youth baseball coach who blew the whistle about Jackie Robinson West using ineligible players — leading to the team being stripped of a Little League national championship — faces disorderly conduct, assault and several other charges in connection with an incident...

Hershel Phillips is the youngest suspect in a large "crash-and-grab" ring that barreled through the doors of high-end stores and made off with more than $2 million in merchandise over the last several months, according to police.

The Chicago Cubs on Tuesday sought City Hall permission to expand construction hours at Wrigley Field, with bleacher work falling well behind schedule on the team's $375 million ballpark renovation project.

The Republican-controlled Congress admitted defeat and sent legislation to President Barack Obama on Tuesday that funds the Department of Homeland Security without the immigration-related concessions they demanded for months.